Rising Mortgage Rates Shouldn’t Halt Home-Price Gains – Fannie Mae

By Michael Aneiro

Mortgage rates slipped last week but few doubt their long-term trajectory is an upward one. Fannie Mae (FNMA) economists Doug Duncan and Mark Palim stopped by the Barron’s offices this week to talk about rising rates and their impact on the housing market.

They looked back at the last two periods of rising mortgage rates prior to last year: in 1994-95 when rates rose by 240 basis points over a 24-month period, and in 1999-2000 when rates rose by 180 basis points over a period of 19 months. In both cases they found that home prices continued to rise but the rate of increase slowed. At the same time the number of homes sold either fell or flattened, while the use of adjustable-rate mortgages, or ARMs, spiked.

What’s different this time, Duncan notes, is that rules for underwriting mortgages, particularly ARMs, have changed, becoming more strict in the wake of a financial crisis that was largely caused by terrible mortgage underwriting standards. Palim says the market should become less volatile as a result of these tighter rules. Duncan sees the 30-year fixed-rate mortgage rate rising to 5.0% by the end of 2014, and he expects the pace of home price increases to be just half of year’s pace, while existing home sales should rise by about 1.8%.

As the Federal Reserve winds down its Treasury- and mortgage-bond-purchasing program, Duncan says 2014 will be about private forces picking up the slack in the mortgage-bond market in the absence of Fed stimulus. “Private parties will get a better value on value,” he says, “and understanding what are these assets worth in the absence of policy support.”

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There are 5 comments

JANUARY 16, 2014 3:12 P.M.

Nodo wrote:

In some markets (South Florida, Orlando, Las Vegas, etc.) cash buyers make up half or more of the market so I see the effects of rising mortgage rates on price increases to be minimal in those areas. In fact, rising rates may spur even more cash buying of real estate for investors seeking higher returns with rentals vs bank rates.

JANUARY 16, 2014 7:37 P.M.

H. Craig Bradley wrote:

SHOW ME, FIRST

The assets in question ( housing) will probably be worth less in the absence of "policy support". How much less is pf course, the million dollar question. Also related is whether the economy can grow at all by itself without government stimulus, FED interventions, and continued low interest rates. Its a huge unknown holding back many individual investors and the stock market. Until the public experiences and sees the general economy picking-up or strengthening, there will remain serious doubts as to the extent of growth actually occurring.

JANUARY 16, 2014 9:41 P.M.

matt wrote:

How the overall economy is doing, and people's confidence, will have a greater impact than a moderate change in rates (especially when coming from all time lows).

JANUARY 16, 2014 9:45 P.M.

Frank wrote:

On July 11, 2013 Trulia reported that some 56% of respondents who planned to buy a home would be discouraged if rates hit 6%. Among renters who planned to buy, about 62% would be discouraged if rates hit 6%.

JANUARY 17, 2014 8:35 A.M.

Freal wrote:

Interesting attempt at saying things are not bad. In 95 and 2000 people were not coming out of a recession that robbed them of 10 million homes through foreclosure, had record setting unemployment and had price increases as we have had for the past decade with negligible salary increases. Promoting housing as being on an upward path for the next few years is a pump & dump exercise.